Gridlock: The Grim Reality

February 1, 2005

A quarter century of under-investment is crippling Canada's public infrastructure, yet the funding necessary to address the problem exceeds what most governments could viably foot under the status quo...

February 1, 2005
by
Lou Smyrlis

Categories

A quarter century of under-investment is crippling Canada’s public infrastructure, yet the funding necessary to address the problem exceeds what most governments could viably foot under the status quo. That’s the grim conclusion of Mind The Gap, an influential report released by the TD Financial Group.

The report places the investment gap – the accumulated annual deficit between the amount needed to properly maintain or replace existing infrastructure as well as support growth and the money actually spent — at somewhere between $50 and $125 billion. (Transportation facilities make up 66 per cent of the “public infrastructure” referred to in the report.)

“After four to five years of renewed government capital spending, momentum to address this problem is already losing steam…With no end in sight to the continual upward pressure on health care costs, competition for scarce public resources is unlikely to let up in the years ahead. In such an environment, infrastructure tends to lose out to other areas of government funding,” the report’s authors, economists Derek Burleton and Beata Caranci, say.

Although they acknowledge it’s uncertain whether the current setback will prove to be temporary or something longer lasting, they say there is a real risk that Canada will ultimately fall further behind in addressing its infrastructure challenges.

“Although the negative impacts of a deficient infrastructure are only starting to mount – and become visible to Canadians on a day-to-day basis – we believe that an on-going neglect of the nation’s stock of public capital represents one of the greatest risks to the country’s overall quality of life,” Burleton and Caranci say. “…The deficiencies are clearly starting to take a toll on the nation’s economy. For example, inadequate highways, border infrastructure and public transit have led to increased congestion and considerable lost time to the private sector.”

The Greater Toronto area alone suffers an annual estimated loss of about $2 billion from congestion and delays of goods shipping, says the report. It warns that with the state of a region’s infrastructure weighing more heavily on the location decisions taken by highly mobile businesses, a deteriorating capital stock will increasingly cut into gains in productivity.

How did Canada fall so far behind? Much of the country’s infrastructure was put in place in the ’50s, ’60s and ’70s. The useful life of most physical structures only extends to four to five decades, so many assets are already ripe for replacement or rapidly approaching the end of their cycle. And there have been a number of developments on both the supply and demand sides that have accelerated the amount of wear and tear on many public infrastructure assets over the past few decades, says the report. These include:

Steady economic growth: Apart from brief periods of recession in the early ’80s and ’90s, the Canadian economy has grown steadily. This has placed an added strain on the country’s infrastructure, particularly in the largest urban centres, which have accounted for the bulk of the gains in economic activity and population growth.

Government deficit problems: The growth in the supply of infrastructure was greatly curtailed in the ’80s and the first half of the ’90s when the federal and provincial governments ran into deficit problems. Not only were cuts to government capital spending more politically palatable than those made to operations, but the ‘big ticket’ nature of large infrastructure projects meant that the immediate savings that could be realized from reductions on that side were substantial, says the report.

Local restrictions: Notwithstand- ing the fiscal woes of the federal and provincial governments, the largest obstacle in the way of satisfying increasing infrastructure demands has been at the local level, the reports argues. It points out that Canadian local governments were asked to take on added responsibilities at the same time as municipal grants were being scaled back. Also, restrictive provincial legislation has kept municipalities heavily reliant on funding these growing infrastructure needs through the use of property tax, a revenue instrument the report’s authors contend “does not tend to grow over time at the same pace as the cost of service delivery.”

Bad policy: Burleton and Caranci also say that a number of ill-thought-out policy approaches have contributed to the problem: “In many instances, a less-than-stellar job has been done maintaining and rehabilitating public assets on schedule, which has acted to shorten the useful life of infrastructure,” says the report. It adds that a number of government policies – including setting the level of property taxes, developing charges and user fees below the cost of delivering a service – have fueled urban sprawl and hence raised the average cost of infrastructure provision.

Burleton and Caranci point to a Statistics Canada study published in 2003, which attempted to quantify the marginal benefit of public capital in terms of the cost savings to the private sector from an additional unit invested in infrastructure. That study concluded that a one-dollar increase in the net public capital stock generates about 17 cents in average private sector cost savings. In other words, assuming an $100 billion infrastructure gap, the private sector is out $17 billion in savings. (The savings vary significantly from sector to sector depending on the reliance of each sector on public infrastructure. Transportation, obviously, has the most to gain and is projected to save more than 40 cents for each dollar of public capital investment.)

Such spending on infrastructure doesn’t come without a price tag. If that $100 billion in the infrastructure gap had been borrowed at a financing cost of 6 per cent, that would have yielded about $6-$9 billion in higher annual debt-service payment, which, the report’s authors point out, is still well below the $17 billion in lower private-sector costs.

The authors acknowledge that total annual public capital spending has been ramped up – from $1.3 billion in the early 1960s to $18 billion in 2002 (the equivalent of $3 billion in 1961 dollars) while outlays for civil engineering works over the same period have risen from about $1 billion per year to $9 billion (or $1.4 billion when translated into 1961 dollars). But they say these amounts are not enough to offset the effects of wear and tear as well as growth in the economy and population.

“No matter how you slice it, the stock of public infrastructure capital has been in a state of decline over the past few decades,” they conclude. “…While the exact cost required to bring Canada’s infrastructure up to scratch and to support future growth is hotly debated, one thing is for sure – the figure exceeds what most governments could viably foot under the status quo.

So what’s the answer? The report recommends a four-part strategy:

Further tilt towards a user pay model: Canada relies more heavily on raising government revenues through income taxes at the federal and provincial levels and property taxes at the local level than most industrialized countries. Often in Canada, there is little effort made to align the price of services with the full cost of delivery. The report’s authors argue that consumption-based levies are the most efficient revenue generator and see significant potential to increase their usage in areas where there are no over-riding equity concerns and where consumption can be accurately measured.

“In stark contrast to trends sweeping the globe – Canada has taken little advantage of utilizing tolls for the purposes of funding roads, highways and bridges,” they say.

Give cities more powers: To deal with infrastructure challenges, municipalities will need increased administrative flexibility and access to additional sources of taxation above and beyond the property tax. The authors cite provincial legislation that would offer local government the power to levy a gasoline tax over a commuter ar
ea on the same base as the province as an example.

Bring the private sector on board: With the demand for public infrastructure outstripping governments’ abilities to finance and maintain capital projects, there is an increasing need to bring the private sector on board to assist with infrastructure challenges, Burleton and Caranci say.

“Commissioning a private sector group to design, build, finance and operate public infrastructure is in its relative infancy in this country, especially when stacked up against the United Kingdom, continental Europe and Australia. It is this country’s relative inexperience with (private-sector groups) and the resulting lack of public understanding of them that remains the number one roadblock of more widespread use of this model,” says the report.

A bigger role for the federal government: Burleton and Caranci argue that, given the enormity of this nation-wide challenge, infrastructure needs to become a centrepiece in the federal government’s agenda.

They conclude that “above all, success in repairing Canada’s growing infrastructure pothole will require an open-mindedness among Canadians to support less-traditional and bolder ways of doing business.”